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Industry calls for permanent solution to CO2 oversupply

22 Nov 2012 14:44:14 | edcm

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Industry members at the energy traders conference in Amsterdam (Emart) have called for binding targets on top of the back-loading proposal to rejuvenate the carbon market and attract clean energy investments.

"Legally binding targets for 2030 and 2050 would firstly help emission certificates trading, as there would be long-term clarity," German E.ON Energy Trading chairman Klaus Schäfer said on Wednesday. "This would also help renewable [electricity generation] to integrate in the market."

The European Commission's back-loading proposal, published earlier this month (see EDCM 14 November 2012), makes it likely that 900m EU allowances (EUAs) will be withheld from the market in the first half of phase III (2013-2020) until the second half. The proposal aims to address the oversupply currently depressing carbon prices, which has seen the EUA benchmark shed more than 70% of its value since phase II began in 2008, according to ICIS data.

According to Deutsche Bank analysis presented at the conference, the EUA oversupply will reach 1.48bn by 2020. A surplus of 1.26bn is projected for 2020, but the recent suspension of international airlines from the EU ETS (see EDCM 12 November 2012) may add a further 217m to the oversupply.

"The Commission's latest proposal is enough to boost prices by the end of 2013, beginning of 2014, but if allowances come back to the market, that would depress prices again at the end of this period, so they need a more definitive solution to make sure the oversupply remains excluded from the market," Deutsche Bank's managing director of commodity research, Mark Lewis, said.

Czech utility CEZ's executive director of sales and trading, Alan Svoboda, said the energy industry had highlighted the need to set a more ambitious climate target for 2030 and beyond.

"The back-loading proposal does not deal with the whole oversupply and does not deal with it permanently," he said, "but it is the first step for a more permanent solution. There is a need for a new plan that goes beyond the back-loading proposal, solving the oversupply."

Energy companies have adjusted their strategy and investment plans according to the expected CO2 market price, but the price's collapse means payback on investments is not guaranteed. Current coal prices make generation from that highly polluting fuel more profitable than efficient gas-fired plants, suggesting that low carbon prices are failing to incentivise clean investments. MM

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